willthrill81 wrote:While it's real value over long periods of time isn't likely to go up, it still has had investment value when it comes to smoothing out returns sufficiently to increase SWRs beyond stock and bond only portfolios, at least for the last ~40 years.

One of the Trinity studies looked at the effect of adding precious metals to one's allocation on retirement portfolio survivability and observed that it helped, but only very slightly. The estimated 35-year survival rate with a 4% withdrawal went from about 96% to 97% when precious metals or precious metals equity was added. This is much less of a difference than the differences between one time period and another, so I'm skeptical that this is a statistically significant difference.

willthrill81 wrote:While it's real value over long periods of time isn't likely to go up, it still has had investment value when it comes to smoothing out returns sufficiently to increase SWRs beyond stock and bond only portfolios, at least for the last ~40 years.

One of the Trinity studies looked at the effect of adding precious metals to one's allocation on retirement portfolio survivability and observed that it helped, but only very slightly. The estimated 35-year survival rate with a 4% withdrawal went from about 96% to 97% when precious metals or precious metals equity was added. This is much less of a difference than the differences between one time period and another, so I'm skeptical that this is a statistically significant difference.

Thanks for the link.

I am not a big fan of MC studies, but I know that many are. At any rate, it seems that holding a small portion of gold certainly doesn't hurt your SWR, and given that it would have helped considerably over the last 40 years, I'm still inclined to think that a 5-10% holding may be a good idea.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

While I really appreciate all of the effort that Larry has done to present the cutting edge research on factor-based investing as well as all of the books that he has written - I've read them all, I totally disagree with him about gold.

First of all, he loves to cherry-pick the time period that begins in 1980 when gold had peaked at $850 to prove a point that it is a terrible inflation hedge. Ask anyone in 1980 if they would believe that we would get sub 3% annualized inflation for the next two decades. Gold was pricing in much higher inflation as were other financial instruments such as treasury bonds. With that logic, should we look at the Nasdaq in the year 2000 and conclude that we should totally avoid technology stocks or any stocks for that matter. Even Larry admits, people should have been buying TIPs in 2000.

That said, I don't even own gold as an inflation hedge. The value of gold can be seen when the real-rate of inflation is negative as was it was in the 70s, a decade that Larry excludes from his analysis. With recency bias of interest rates in a 30+ year bull market, I believe some can forget that stocks and bonds can perform poorly at the same time. This is when gold can become valuable in your portfolio. Even Larry says that you shouldn't look at the components of your portfolio in isolation.

Trying to calculate the price of gold using the CPI or PCE is fruitless. Jim Grant, of Grant's Interest Rate Observer, recently picked apart the methodology of these price indexes.

As far as the cost of production. We've been hearing gold miners say that they can produce an ounce of gold for <$500 an ounce for years, and they continue to lose money hand-over-fist every year, when the price is north of $1,000. Also, gold is different than other commodities, anyway, because not much gold is consumed, almost all gold ever mined remains as above-ground stock so that the annual production of gold is rather meaningless to the existing supply of gold that can be bought.

Larry likes to create portfolios that diversify risks which logically would include an small allocation to gold since it increases the Sharpe Ratio of almost every portfolio. He recommends high expense ratio total commodity funds due to its diversifying effects to a portfolio, but he shuns gold. It doesn't make sense to me.

Jiu Jitsu Fighter Those like you who claim cherry picking don't get the point which is that gold cannot be a good inflation hedge for the average investor with a typical horizon if it can lose 90% of its real value over a 25 year period, any period. If it is an inflation hedge, which is one of the main reasons, if not the main reason it's touted, then that cannot happen. So to test that you look for exactly the type period I show, proving the point. It is not a good inflation hedge unless your horizon is perhaps 100 years.

Now there may be other reasons to consider gold. But as inflation hedge it is not, TIPS are the best inflation hedge by far and a broad basket of commodities would be second. But not gold, at least for most investment horizons.

larryswedroe wrote:Now there may be other reasons to consider gold. But as inflation hedge it is not, TIPS are the best inflation hedge by far and a broad basket of commodities would be second. But not gold, at least for most investment horizons.

Larry,

Why then do you not suggest TIPS or commodities for the LP? Or do you have another portfolio that incorporates these asset classes?

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

willthrillCertainly can include TIPS and commodities in the larry portfolio, never said otherwise. In fact at times have owned both. With TIPS used them when real yields were well above 2% and I wanted to lock them in for long time.

The problem with TIPS is that for those investors with access to CDs the risk premium giving up for unexpected inflation becomes pretty high,and given that I don't recommend taking lots of term risk (say 4-5 year duration) there's not a lot of risk of unexpected inflation. The problem with CCF is first if you use the LP to have low equity allocation you don't have much need of CCF to provide you protection against big supply shocks that hurt stocks, and the relatively short duration on bond side limits inflation risk (and for many years now CCF have had big headwinds in the contango on energy, which is why I have not owned it in long time myself--valuations and in this case costs matter).

Also if want to limit inflation risk the LENDX product provides pretty good hedge given its very short duration and limited equity risks (so good again if have low equity allocation).

larryswedroe wrote:The problem with CCF is first if you use the LP to have low equity allocation you don't have much need of CCF to provide you protection against big supply shocks that hurt stocks, and the relatively short duration on bond side limits inflation risk (and for many years now CCF have had big headwinds in the contango on energy, which is why I have not owned it in long time myself--valuations and in this case costs matter).

Larry,

You and Bill Bernstein had a spirited discussion here a few years back here on CCFs and he seemed to side on investing in the stocks of commodity producers (such as energy and precious metals companies) because of issues with contango, while you made the case for CCFs and their lower correlations with stocks compared to stocks of commodity producers, though I think you mentioned in that discussion you hadn't owned them in a while, either. Do you view investing in the stocks of commodity producers any differently than investments in gold (such as a precious metals fund)? I read your book on alternative investments back in 2007 and you were lukewarm on precious metals, just curious if anything has changed since then.

asifI believe Bill is in favor of the gold miners, not commodity producers in general.And to me, my belief was that large persistent contango would in effect resolve itself as it would likely lead to poor returns and cash would flow out and reduce, eliminate the problem. That hasn't happened. So since costs due matter I have not owned CCF and now with very good alternatives such as LENDX and SRRIX that tie up space in tax advantaged accounts I would not in my own case own CCF any longer, preferring these alternatives, as well as funds like AQR style premium and managed futures (which does have tail hedging risks properties).

To me the problem with producers is that the correlations to equities are too high in general and thus get that risk which I don't want more of. Larry

One thing that prevents me from investing in gold is technology. Being in the commodities business, we have seen how massive technological breakthroughs when extracting fossil fuels (Oil & Gas) has caused the overall pricing complex to be completely re-set to lower production costs and ultimately lower commodity prices. If this happened in gold mining, gold prices would in turn re-set to much lower levels. This is a huge downside risk IMO.

If digital currencies such as Bitcoin ever gain traction they could have the same effect. That said, I do own a small amount of gold (about 3%), though I think of it more as a hedge against volatility than inflation.

Because of the US and other countries going on and off the gold standard several times in the last 150 years, historical data is fairly biased and unreliable. There are significant limitations of Monte Carlo simulations as well, not the least of which is that historical data is used to estimate the probability distributions for the random variables being simulated.

I nonetheless do not think it is very likely that a big benefit or big detriment was exactly cancelled out by a bias in the Monte Carlo simulation.

Because of the US and other countries going on and off the gold standard several times in the last 150 years, historical data is fairly biased and unreliable. There are significant limitations of Monte Carlo simulations as well, not the least of which is that historical data is used to estimate the probability distributions for the random variables being simulated.

I nonetheless do not think it is very likely that a big benefit or big detriment was exactly cancelled out by a bias in the Monte Carlo simulation.

We still have 40+ years of gold data in the U.S. since the gold standard was abandoned. I personally place more value in those data than MC simulations. But I'll admit that there are a lot of people out there a lot smarter than me who really like them.

My experiences with statistical modeling of far less complex phenomena than the financial markets lead me to question whether any statistical technique can actually model such an incredibly complex system, even when using historical data as inputs. I think that, at best, all they can do is put 'twists' on the historical data from many different angles to give an illustration of the historical importance of certain inputs on the outcome.

Based on the reliable historic data that we do have for gold, I think that it may deserve at least a small place (even just 5%) in a retirees' portfolio. There certainly seems to be more upside potential than downside risk.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

We still have 40+ years of gold data in the U.S. since the gold standard was abandoned.

Some period of unknown length right after the gold standard was abandoned is still biased by havjng recently been on the gold standard.

If you are looking at the effect on 40-year returns, one 40-year period is a sample of one data point in any case.

I am not opposed to the idea of holding PME for diversification benefits, but I think it is very difficult to assess the benefit or lack thereof. Just the question of what is the historical return of PME is difficult to answer because its extreme volatility makes the assessment fairly sensitive to start date.

willthrill81 wrote:We still have 40+ years of gold data in the U.S. since the gold standard was abandoned. I personally place more value in those data than MC simulations. But I'll admit that there are a lot of people out there a lot smarter than me who really like them.

Other countries also have abandoned the gold standard. The UK did it in 1931. Why aren't we talking about how gold did in the UK over the past 85 years?

willthrill81 wrote:We still have 40+ years of gold data in the U.S. since the gold standard was abandoned. I personally place more value in those data than MC simulations. But I'll admit that there are a lot of people out there a lot smarter than me who really like them.

Other countries also have abandoned the gold standard. The UK did it in 1931. Why aren't we talking about how gold did in the UK over the past 85 years?

Excellent question! I'd love to see those data.

“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

One property of gold as an investment that has not been discussed is its ability to act as a safe haven. Harvey & Erb sort of dismiss this by looking at one- month returns of gold and the S&P. They find that 17% of the time that both gold and the S&P have negative return. They say: "This suggests that gold may not be a reliable safe haven asset during periods of financial stress."

Larry's comment: " Still, 83% of the time on the right side isn't a bad record." is more to the point. Gold may not be a perfect safe haven but it often works. And those who held gold during the 2008 financial crisis I suspect were pleased with its performance.

I believe too often portfolios are viewed entirely through the lens of their individual components which is clearly the case for most posts in this thread. In my view, the far more important factor is how do the component pieces and parts work together as a team and this is particularly the case for a fixed allocation portfolio. Merits or drawbacks of gold as an asset aside, just review the performance of gold during stock market meltdowns and look at the performance of gold during a stock market melt up. Weak or negative correlation alone in a fixed allocation portfolio is beneficial, and unlike say VIX futures, gold doesn't extract an insurance cost. Gold also tends to be quite volatile compared to bonds which is a helpful property when mixed with stock. If one goes by just the math as has been pointed out, then being anti gold i think is a difficult argument to make.

But hey, if facts aren't your thing, that's ok too. It's our personal fortunes on the line so we should do what we personally think best.

So again the question we would want to answer is what will the correlations look like going forward. Unfortunately, answering that question is not in fact as simple as looking at what they were in the past, particularly when we know there have been relevant changes such as the unwinding of Bretton Woods.

As for "insurance cost"--if gold ends up being a zero return or negative return asset, it very well might be imposing a very large, indeed prohibitive, "insurance cost" to hold gold for various purposes. And depending on the purpose, there may well be lower-cost forms of "insurance".

Again, I have no intention of trying to argue fans of gold out of their position. But at least one should recognize it is not in fact a matter of simply doing some math. It is a matter of doing some math AND then assuming the future of gold will look relevantly like its past. And that second assumption is the one I personally don't feel comfortable making.

So again the question we would want to answer is what will the correlations look like going forward. Unfortunately, answering that question is not in fact as simple as looking at what they were in the past, particularly when we know there have been relevant changes such as the unwinding of Bretton Woods.

As for "insurance cost"--if gold ends up being a zero return or negative return asset, it very well might be imposing a very large, indeed prohibitive, "insurance cost" to hold gold for various purposes. And depending on the purpose, there may well be lower-cost forms of "insurance".

Again, I have no intention of trying to argue fans of gold out of their position. But at least one should recognize it is not in fact a matter of simply doing some math. It is a matter of doing some math AND then assuming the future of gold will look relevantly like its past. And that second assumption is the one I personally don't feel comfortable making.

TheTimeLord wrote:Information a bit dated but does compare gold over a 40+ year period.

Again, increasing the length of the sample does not necessarily help if there is a structural break during the sample period. Indeed, to the extent you are adding more data from before the structural break (in this case going all the way back to 1965), you may just be making the results even less accurate when it comes to forecasting.

To give a brief analogy--I happen to be 45. If you did a crude analysis of my height over the last 40 years, you might predict that I was increasing in height. That prediction would prove to be wrong. If you then looked back 5 more years on top of that 40, you'd be even more wrong.

We know the problem here--I stopped growing in height in my early 20s and the data from before that period is now no longer useful in predicting what is going to happen to my height next. And making the period longer doesn't help if it is just adding data from before the point I stopped growing.

TheTimeLord wrote:Information a bit dated but does compare gold over a 40+ year period.

Again, increasing the length of the sample does not necessarily help if there is a structural break during the sample period. Indeed, to the extent you are adding more data from before the structural break (in this case going all the way back to 1965), you may just be making the results even less accurate when it comes to forecasting.

To give a brief analogy--I happen to be 45. If you did a crude analysis of my height over the last 40 years, you might predict that I was increasing in height. That prediction would prove to be wrong. If you then looked back 5 more years on top of that 40, you'd be even more wrong.

We know the problem here--I stopped growing in height in my early 20s and the data from before that period is now no longer useful in predicting what is going to happen to my height next. And making the period longer doesn't help if it is just adding data from before the point I stopped growing.

Understood. But, what's strange is that you only apply this reasoning to Gold. There have been multiple structural breaks in every asset class in history.

TheTimeLord wrote:Information a bit dated but does compare gold over a 40+ year period.

Again, increasing the length of the sample does not necessarily help if there is a structural break during the sample period. Indeed, to the extent you are adding more data from before the structural break (in this case going all the way back to 1965), you may just be making the results even less accurate when it comes to forecasting.

To give a brief analogy--I happen to be 45. If you did a crude analysis of my height over the last 40 years, you might predict that I was increasing in height. That prediction would prove to be wrong. If you then looked back 5 more years on top of that 40, you'd be even more wrong.

We know the problem here--I stopped growing in height in my early 20s and the data from before that period is now no longer useful in predicting what is going to happen to my height next. And making the period longer doesn't help if it is just adding data from before the point I stopped growing.

Understood. But, what's strange is that you only apply this reasoning to Gold. There have been multiple structural breaks in every asset class in history.

I was thinking the same thing. His rigor is not equally applied across the board or he would be paralyzed by his analysis. Not necessarily a fan of gold but do get frustrated by the constant mischaracterization of the utility the asset has.

Larry, one of the things I've never understood about your position on Gold... You always say an asset has to be looked at in the context of the rest of the portfolio. You do that with Commodities -- but doesn't Gold's worth work in the same way?

For instance, with Portfolio visualizer monte carlo, replacing 10% of TIPs and Short Term Treasury with Gold in the "Larry minimize fattail portfolio" you get considerably higher median result after 30 years, with narrow spread of worst and best results.

jmkOf course gold should be considered as within context of portfolio. I never said otherwise. I just don't think it fits better than assets it would have to replace, and it's definitely not an inflation hedge, not for any reasonable time line. Now if you want to own it for political risks perhaps, but ever there are just better alternatives IMO--for example, people claim gold helps because you can say take it with you. But the problem is when that risk shows up they come with the machine guns to prevent you from taking it. So I don't buy that argument either. At most I would allocate a very small percentage, but not above that. And maybe be a buyer when it's price is relatively low, relative to that golden constant, which it certainly isn't now, or low relative to the cost of production, which it isn't now.Bottom line IMO it's very tough to make case for including it, and only the "gold bugs" do. It's kind of like the dividend buyers. Just my opinion of course. But I just cannot see a strong case for inclusion. And if did buy it would be PME where at least should get the equity risk premium, in theory.

TheTimeLord wrote:I was thinking the same thing. His rigor is not equally applied across the board or he would be paralyzed by his analysis.

As it turns out, I don't do any back-testing for optimization purposes at all, and yet I do in fact remain unparalyzed. Ultimately I found it quite liberating to accept that I have no way of determining with precision what the future optimal portfolio will look like--it certainly saves me a lot of time and effort searching for such a holy grail.

I view gold as Bitcoin that you can't make teeth out of. The people that sell it to you hype it as "protection against fiat currency" while wanting your fiat dollars in exchange. And ultimately almost everyone is just holding a piece of paper or a series of electrons.

Even if you have "yard gold," imagine a world in which you have to spend it--any doomsday scenario means you'd get killed trying to buy a chicken with a Golden Eagle. Gold is just another faith system. I don't see anything better or worse about it, and therefore no compelling reason to either own it or not. It's not like it's guaranteed to have a certain value in the future, despite its long history.

TheTimeLord wrote:I was thinking the same thing. His rigor is not equally applied across the board or he would be paralyzed by his analysis.

As it turns out, I don't do any back-testing for optimization purposes at all, and yet I do in fact remain unparalyzed. Ultimately I found it quite liberating to accept that I have no way of determining with precision what the future optimal portfolio will look like--it certainly saves me a lot of time and effort searching for such a holy grail.

If you don't believe in back-testing at all, why argue about its applicability to gold then?

And, ultimately, unless you buy either a random portfolio or the total world asset market, any asset allocation depends upon some theory based on history.

JFP_SF wrote:If you don't believe in back-testing at all, why argue about its applicability to gold then?

Well, my actual reason for not holding gold is just that it doesn't provide an economic return and it likely has a far higher price at present than its industrial value alone would warrant, which in my view makes it a precarious thing to hold.

Some people then respond, as happened in this thread, with the argument that if you back-test a portfolio with gold over the right period of time, gold appears to improve the performance of that hypothetical historic portfolio. In response to that specific argument, I might point out reasons why the period in question includes data we know to be unreliable.

But in an appropriate context, I am also happy to explain why I don't use back-testing for portfolio optimization in general. In this particular thread, though, that would seem to be quite tangential--unless perhaps someone suggests my thoughts on back-testing portfolios with gold are somehow inconsistent with my general views on back-testing, in which case I might correct that misapprehension.

As an aside, I wouldn't say I don't believe in back-testing at all. I think back-testing can be productively used in certain ways--for example, I think it can be useful to illustrate how a certain plan might have failed in the past, which could perhaps help people think about risk in a more informed and careful way. The problem is when you turn that point around and start believing if a back-tested plan survived, was optimal, or so on, over some past period, that means it must do the same over an upcoming future period that concerns you.

And, ultimately, unless you buy either a random portfolio or the total world asset market, any asset allocation depends upon some theory based on history.

Well, some theory, for sure (even the total world approach is based on a theory). The degree to which that theory is "based on history" is another matter. And even to the extent some consideration of history is involved, again I think history can teach us many things without us then going ahead and assuming what worked in the past will work the same way in the future.

One study says it works elsewhere. Bauer & McDermott 2009, Is Gold A Safe Haven? International Evidence

They say:

" Yes for US and major European stock markets but not Australia, Canada, Japan and large emerging markets such as the BRIC countries."

It is interesting that you interpret that as "working elsewhere"

I guess it works "some places". But gold's failure to be a safe asset in Australia, Canada, Japan, Brazil, Russia, India, and China would seem to undermine any real claim to fundamental value in a portfolio.

How would gold work in portfolios denominated in US dollars (probably most of us on the forum) if the dollar were to become the number two world reserve currency (think of when the US dollar dethroned the British Pound)

Has anyone seen portfolios of investments denominated in British pounds which include gold as a 5% holding with the remainder being a 60/35 portfolio? What about portfolios denominated in Euros?

TX_Man wrote:How would gold work in portfolios denominated in US dollars (probably most of us on the forum) if the dollar were to become the number two world reserve currency (think of when the US dollar dethroned the British Pound)

Has anyone seen portfolios of investments denominated in British pounds which include gold as a 5% holding with the remainder being a 60/35 portfolio? What about portfolios denominated in Euros?

If the US dollar loses its primary reserve status, I would expect gold to do very well indeed, at least in US dollar terms, because that would eliminate one of the major draws of holding the US dollar.

In theory, theory and practice are identical. In practice, they often differ.

TX_Man wrote:How would gold work in portfolios denominated in US dollars (probably most of us on the forum) if the dollar were to become the number two world reserve currency (think of when the US dollar dethroned the British Pound)

So as you may know, the USD hit a high in terms of percentage of global reserves circa 2000, in the low 70s. It gradually declined up to 2008 or so, hitting a low in the low 60s, and then has increased back again somewhat.

It would take quite a bit for any other single currency to actually get ahead of the USD. The Euro has the next largest share, and it is not necessarily a good bet to achieve that status any time soon, particularly if the UK never joins. However, it is possible the USD will gradually decline in share again and eventually end up just a plurality and not a majority currency.

Personally, I think that would have very, very little affect on anything. Maybe US government borrowing rates would go up slightly--probably not enough that anyone would notice versus just normal rate factors.

That said, of course a much bigger issue would be whether private investors in general exhibited less demand for USD-denominated assets. That's ultimately a much, much bigger issue than just reserve currency, and I would suggest people at least provide some insurance against that eventuality. Personally, though, I think there are better bets than gold to insure against such an eventuality.

Indeed, even if you were specifically concerned about, say, the USD losing plurarlity reserve status to the Euro, the obvious thing to do would be hold more Euro-denominated assets. And so forth--there are lots of ways to hedge against USD currency risk using actually productive assets.

Welcome to Bogleheads, NiceUnparticularMan! I think many lawyers in their late 30s - early 40s would recognize your moniker. I remember discussing law school applications and philosophy with you back in 2001 on PR. You were a top quality poster.

Gold is still a metal that is mined and it is pretty abundant in old mining claims where the scrap heap has left over gold. Those heaps can be mined very easily and profitably at prices around $1000 and up. And places like Gold Hill and Virginia City and others in Nevada were booming when gold went to $1600. Now that it has dropped back to $1200 is is not that profitable and work has slowed a lot but still is going forward. So any price increase above this will see fast and strong downward pressure by miners.

As far as gold being a inflation protection I just do not see it. Look at the long term price charts for gold. See below. It does not keep up with inflation nor does the price in any year track or correlate versus other commodities or the stock market or anything. It is completely random what price you can expect to pay or sell your gold for next year. That is just not a good store of value IMO. It is just a useful metal with a small market for jewelry and a few other things. Oil or diamonds are much better holders of value IMO.

IMO oil is the ultimate commodity for inflation protection. Society runs on it. It makes up 50% to 70% or so of the cost of most other commodities like beef or pork bellies or sugar. So just owning oil or oil futures gives you a great inflation hedge.

And as far as small portable holders of value you cannot beat diamonds. They are fantastically expensive and closely track inflation and have steadily increased in value for decades. See below. So a handful of of .5 to 1 carrot diamonds would serve immigrants much better than carrying some gold.

market timer wrote:Welcome to Bogleheads, NiceUnparticularMan! I think many lawyers in their late 30s - early 40s would recognize your moniker. I remember discussing law school applications and philosophy with you back in 2001 on PR. You were a top quality poster.

btenny wrote:IMO oil is the ultimate commodity for inflation protection. Society runs on it. It makes up 50% to 70% or so of the cost of most other commodities like beef or pork bellies or sugar. So just owning oil or oil futures gives you a great inflation hedge.

And as far as small portable holders of value you cannot beat diamonds. They are fantastically expensive and closely track inflation and have steadily increased in value for decades. See below. So a handful of of .5 to 1 carrot diamonds would serve immigrants much better than carrying some gold.

Oil is a wee bit hard for the small investor to store. Diamonds would be OK, but storage could still be a minor problem. I had an instructor who's wife liked to collect diamond jewelry. They had a house fire and her investment went up in smoke.

I think I'll stick with investing in Bogle Bobble Head Dolls. The price is sure to take off once Jack gets that Presidential Medal of Freedom. . .